Ireland

The focus should be increasingly on measures that can help unblock growth. One dimension which, in my personal view, has not yet received the attention it deserves is the potential for mutually beneficial risk-sharing mechanisms. A variety of financial engineering options could be considered going beyond the plain vanilla bonds currently employed. Read more

Markets remain nervous about Ireland after yesterday’s stress test results – despite the fact they appeared thorough and the €24bn recapitalisation they recommend matches expectations. This has prompted Europe’s biggest clearing house LCH.Clearnet to again raise the margin requirement on clearing of Irish debt, back up to 45bp from 35bp. Effectively, this increases the cost of holding Irish bonds and decreases the cost of shorting them.

Note: Anglo Irish Bank and Irish Nationwide Building Society were not included in the exercise because their loan books are being wound down. Anglo was fully nationalised in January 2009 and Nationwide is “effectively state-owned”. Both have required substantial state aid.

The headline figure of €24bn is better than many expected, particularly since about a fifth of it is for an additional capital “buffer” that goes beyond the 10.5 per cent tier one requirement in the base scenario, and 6 per cent requirement in the adverse scenario. Without this additional requirement, the recapitalisation requirement would be €18.7bn. The Irish central bank seems to have gone for the warts-and-all approach, which bodes well for the reliability of the numbers.

As well as raising new capital, banks will need to sell many of their non-core assets, following a deleveraging plan agreed with the central bank “in order to transition to smaller balance sheets and a more stable funding base”. They will separate assets into core and non-core, gradually selling off the latter. But shareholders, take heart: first, this will not be done in a hurry; second, the losses this will inevitably incur are already factored into the analysis: Read more

The sums involved in propping-up Ireland’s banking system are so great – and the chances so small of them falling dramatically any time soon – it was inevitable the European Central Bank would want to find a better, longer term solution.

Currently, the total amount of ECB liquidity and “emergency liquidity assistance” provided by the Irish central bank, both essentially on an ad-hoc basis, is not far south of €200bn.

Hence news at the weekend that the ECB is looking at some kind of facility for eurozone banks in restructuring is not surprising. We have known for some time that the ECB was looking at ways to deal with “addicted banks” – those totally reliant on its liquidity and unable to fund themselves normally in financial markets. Ireland’s banks clearly fall into that category. Read more

Cast your mind back to the good old days, when a high yield meant 6 per cent and nervous market talk might culminate in whispers of a bail-out. Compare and contrast with the situation now, where two states have long since passed the point of bail-out and there is real and present danger of a default.

Much focus is on Portugal, lined up somewhat unwillingly for the next cash injection. It must make an unappealing prospect as two already-medicated patients have just taken a sharp turn for the worse. Yields on Irish bonds rose nearly an entire percentage point during trading yesterday to touch 10.7 per cent. As a reminder, Irish yields were about 8 per cent at the time of the bail-out. And it bears repeating: Irish yields are above bail-out levels even though Ireland has been bailed out. Ditto Greece.

Eurozone leaders are due to begin a scheduled meeting in Brussels about now. They’ll have plenty to discuss. A possible bail-out of Portugal will certainly be on the agenda but it might not make the top of the list. After all, Read more

Irish banks may need more than the €10bn set aside for them in the bail-out, the Irish finance minister has said.

Michael Noonan said in Brussels today that recapitalising Irish banks could not take place till stress tests were completed, but that he would be “surprised” if €10bn were enough. The Irish Independent claimed over the weekend that “a further injection of between €15bn and €25bn could now be needed”. Mr Noonan told reporters he expected the size of the shortfall to be revealed by stress tests, whose results are due to be published by the end of March. Read more

Ireland’s new PM turned down an offer to improve the terms of the bail-out deal – and the Irish public are overwhelmingly behind him. Seventy-eight per cent of those polled think Mr Kenny was correct to refuse trading higher corporate tax rates for lower rates on bail-out loans.

Ireland’s troubles remained notably unaddressed in a bold agreement between eurozone ministers early on Saturday morning. In a sign of ongoing market stress, yields on Irish government debt have continued to rise today, unlike those of Greece, Spain and Belgium, which have fallen. Read more

The ECB is succeeding in its mission to wean Irish banks off emergency eurozone support – but at a cost. Data from the Irish central bank suggest that support for Ireland’s banking sector rose €18.9bn in the month to February 25 to stand at €70.1bn (red on the chart). ECB support fell €9bn to stand at €116.9bn (blue on the chart). This means that combined assistance rose €10bn to €187bn, a new record. As you can see on the chart, combined assistance (the total height of the bar) dipped in the month to January, but has now risen again, suggesting banks’ needs are growing.

For the Irish central bank, assistance to the banking sector (under “Other assets”) now constitutes more than a third of total assets. Indeed, assistance for banks is approaching half of the country’s GDP. As David Owen, chief European economist at Jeffries points out: “There is a school of thought that this €70bn or so of emergency liquidity is a contingent liability of the Irish state and so should be treated as such. If so, then outstanding Irish government debt-GDP could soon be heading towards 175 per cent. It will be interesting to see what the IMF says on the subject, when it publishes its assessment of the economy and debt dynamics 15 March.” Indeed it will.

A look at the data on Greece and Ireland should stay the hands of policymakers keen to bail-out Portugal. If those two bail-outs were intended to reassure markets, they have failed. Clarity on bondholder rights might be a better target.

Ireland was bailed out in November. Despite knowing €85bn is on tap, markets priced Ireland’s ten year cost of debt at a record high yesterday: government bonds trading in the secondary market closed at 9.39 per cent. See green line on chart, right. (Note: this number does not affect the Irish government directly since they do not finance their loans from the resale market: it is a proxy for the rate the government would have to pay to borrow from the market at auction.) These record levels are more than a percentage point higher than levels that prompted the bail-out, and just higher than the previous record which occurred post bail-out (since yields, bizarrely, rose).

Greece was bailed out in May. But Greece’s ten year cost of debt touched a record 12.82 per cent during yesterday’s trading. Their ten year debt closed at 12.68 per cent, second only to a rough patch in January. Bail-outs are useful when there’s a temporary cashflow problem – but continued and rising market stress should tell us that something else is at play. Read more

The European Central Bank was guilty of a “major failure of supervision” in not restraining lenders from fuelling the property bubble in Ireland, says a former prime minister.

John Bruton, premier in the 1994-97 centre-right, Fine Gael-led coalition, on Monday accused British, German, Belgian and French banks of “irresponsible lending . . . in the hope that they too could profit from the Irish construction bubble.” Mr Bruton said in a speech to the London School of Economics that banks had “lots of information available to them about spiralling house prices in Ireland”. They were supervised by their national central banks and by the ECB which “seemingly raised no objection to this lending.” Read more

Weaning Irish banks off emergency funding from the ECB will take longer than hoped, after Irish authorities suspended plans to force the country’s troubled banks to sell off huge portfolios of loans.

The country’s banks need to offload as much €100bn ($139bn) of legacy assets as they undergo a drastic clean-up of their balance sheets following the huge losses they suffered during the financial crisis. The ECB wanted the deleveraging to be undertaken quickly so the banks could whittle down their reliance on emergency funding, which has risen to about €140bn. Read more

Irish pluck and entrepreneurship remain undiminished by the country’s banking and economic crisis. John Bruton, the former Taoiseach (prime minister), was in Frankfurt today as ambassador for Ireland’s international financial services industry, arguing the case for its future growth.

The idea might send a chill down the spines of some in Frankfurt, including at the European Central Bank. Ireland has been the source of some of the biggest banking disasters to face the eurozone, including at branches of German banks. Read more

S&P cut Ireland’s credit rating by one notch today, taking it to A- (still several notches above Moody’s and Fitch, at equivalent peggings of Baa1 or BBB+ respectively). Yet markets continue to relax, with the Irish ten-year cost of debt falling 20 basis points today, a fifth of one percent; at 5.45pm they were 8.8 per cent.

The cost of debt for Spain, Portugal, Italy, Belgium and Greece have all fallen, too. Greek yields are below 11 per cent for the first time since early November.

Gary Jenkins, head of fixed income for Evolution Securities, says: “It is interesting that while the story [that the EFSF mandate will be widened to allow debt buybacks] has been doing the rounds for three weeks now, yesterday was the first day since then that we have witnessed yields moves of such a magnitude, which does make one wonder if there has not been a leak ahead of the European leaders’ summit on Friday.” Read more

The European Central Bank still faces a stand-off with Dublin. The FT reports today the warning by Lorenzo Bini Smaghi, an ECB executive board member, that Ireland cannot expect to renegotiate the terms of its bail-out. The matter has become an issue in the country’s election campaign.

RTE, the Irish broadcaster, has now posted the full interview with Mr Bini Smaghi. It’s a great example of slick, central bank transparency. Diplomatically but firmly, Mr Bini Smaghi warns Ireland’s politicians that if they imposed losses (a “haircut”) on Irish senior bank bondholders, “immediately you would have a run on the banks”. Irish account holders themselves would worry about the security of their savings. The end result could be a collapse of the banking system – and the Irish taxpayers would face an even larger bill.

Irish taxpayers had to bear responsibility for the crisis, he made clear. They supported a low tax system that created the good times; it was only right that they should shoulder the cost when things went wrong.

Mr Bini Smaghi denied the ECB had pushed Ireland into last year’s bail-out, Read more

Klaus Regling, EFSF chief, is apparently wondering whether he could have demanded better terms for Tuesday’s 2016 bond, given spectacular demand. Indeed, he probably could have secured a higher price (lower yield) – a valuable lesson for the remaining €21bn-odd debt to be issued this year. But would Ireland benefit if he did, or would the EFSF just stand to make a bigger margin?

The 2016 €5bn bond issued by the eurozone yesterday is intended to finance a loan for Ireland. Lex points out that of the €5bn raised at 2.89 per cent, only €3.3bn will be lent to Ireland – at about 6.05 per cent. (The final cost to Ireland and the exact loan amount won’t be known tillthe EFSF has reinvested the cash reserve and buffer.) Read more

Confidence in Ireland could plummet today if the PM faces a vote of no confidence. Political uncertainty, as Belgium has shown, can seriously undermine the market’s faith in a country’s finances. And market reaction seems to be the main call to action for EU politicians. And just when we thought focus had switched to Portugal.

Now Ireland, as we know, has been bailed out already. Its funding is pretty well lined up – importantly, from diverse sources. The weak point is the banks. As long as any handover is smooth and quick, a change of government could be relatively painless for Ireland. Read more

Last week, the Swiss National Bank let it be known that it no longer accepted Portuguese sovereign debt as collateral in its open market operations. An official from the SNB said: “Only securities that fulfil stringent requirements with regard to credit rating and liquidity are accepted as collateral by the National Bank”.

The Bank of England has almost identical criteria for accepting euro-denominated sovereign bonds in its market operations. They have to be rated Aa3 or higher on the Moody’s scale or higher than that by at least two other ratings agencies and traded in liquid markets.

Portuguese and Irish sovereign bonds fail this test. But the Bank does not apply a mechanical rule and, as its daily collateral list shows, it is still smiling on Portugal and Ireland, but not Greece. In a market notice from the time of the Greek crisis, the Bank asserts its discretion, insisting it “forms its own independent view on collateral it takes in its operations”. Read more

Ireland’s fate should be a cautionary tale to those pushing Portugal towards a bail-out. Ireland’s bail-out – arguably not needed – didn’t work.

Government bond yields – a measure of market stress – rose above 8 per cent, and Dublin found itself inundated with offers of cash. This unlimited funding should have been enough to reassure markets, but it was not, proving a cash shortage was not the problem. Politicians ignored this, and the offers became more insistent. Ireland accepted a loan, but markets were unimpressed and yields stayed above 8 per cent. A month later, yields returned above pre-bail-out levels of about 8.4 per cent. Now they are nearer 9 per cent. The Irish bail-out was misdirected, targeting the symptom and not the cause. Bond markets were worried about bondholder rights, not a cash crunch. Making cash available while remaining vague on bondholder rights was a mistake. Read more

The Swiss National Bank no longer accepts Ireland’s government bonds as eligible collateral in its repo operations. It’s probably not earth-shaking for holders of Irish government bonds, following earlier margin calls on these assets by LCH.Clearnet last year. On the other hand, it’s an interesting window into how at least one European central bank is taking care over its collateral, unlike a few others we could mention.

Modifications to the SNB’s collateral baskets over the last year emerge in this little spreadsheet (Excel file). Several other Irish-domiciled assets also became nicht Repo-fähig in late December 2010, around the time Ireland lost its last AA- credit rating. Anglo Irish medium-term notes, Depfa bonds, etc.

The SNB’s eligible collateral criteria require that securities posted for repo have this AA- rating and that their country of domicile also bears the same rating, which seems open and shut. Until you read that the bank can make exceptions for sovereign securities rated below AA-.

The Irish cost of debt is now above the levels that prompted the bail-out. Yields on ten-year bonds closed at 8.4 per cent on Friday and rose higher today. On November 23, yields of about 8 per cent prompted the bail-out (and then rose higher…).

There are further signs of tension in Ireland, which it seems the bail-out has done little to allay. First, a £10bn swap was set up on Friday between the Bank of England and the ECB in order to provide Irish banks with sterling liquidity that they might otherwise struggle to find.

As the ECB worries about Irish bail-out legislation, and the EU rushes to raise the cash, bond yields in Ireland, Greece and Spain seem to mock these administrative efforts; the latter two again at record highs.

If the legal status of euro area bonds were the major cause of market nerves – rather than Ireland’s fiscal Read more

The Money Supply team

Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS

Claire Jones is the FT's Eurozone economy correspondent, based in Frankfurt. Prior to this, she was an economics reporter in London. Before joining the Financial Times, she was the editor of the Central Banking journal. Claire studied philosophy and economics at the London School of Economics. RSS

Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS

Sarah O’Connor is the FT’s economics correspondent in London. Before that, she was a Lex writer, covered the US economy from Washington and the Icelandic banking collapse from Reykjavik. Sarah studied Social and Political Sciences at Cambridge University and joined the FT in 2007. RSS

Ferdinando Giugliano is the FT's global economy news editor, based in London. Ferdinando holds a doctorate in economics from Oxford University, where he was also a lecturer, and has worked as a consultant for the Bank of Italy, the Economist Intelligence Unit and Oxera. He joined the FT in 2011 as a leader writer. RSS

Emily Cadman is an economics reporter at the FT, based in London. Prior to this, she worked as a data journalist and was head of interactive news at the Financial Times. She joined the FT in 2010, after working as a web editor at a variety of news organisations.
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Ralph Atkins, capital markets editor, has been writing for the Financial Times for more than 20 years following an economics degree from Cambridge. From 2004 to 2012, Ralph was Frankfurt bureau chief, watching the European Central Bank and eurozone economies. He has also worked in Bonn, Berlin, Jerusalem and Brussels. RSS

Ben McLannahan covers markets and economics for the FT from Tokyo, and before that he wrote Lex notes from London and Hong Kong. He studied English at Cambridge University and joined the FT in 2007, after stints at the Economist Group and Institutional Investor. RSS